(Written by Evan Aloe, Rabbu's Chief Revenue Officer)
Often characterized by southern charm and a slower pace, the southeast has burst onto the startup scene over the past decade with several unicorns. This seemingly sudden success actually took quite a long time to come to fruition.
The region as a whole has a very different investment profile than most other startup hubs in the US. Knowing how the region is defined and how its investors behave can be the difference between a successful launch and a struggle for capital.
The southeast has three key attributes that will affect an early stage company:
- A growing number of startups but a limited number of angel/venture focused capital providers creates more competition for investment dollars.
- Investors typically have accumulated their wealth over the full length of their careers and, as such, guard it much more closely.
- Massive brand name corporations in the area create stable employment bases with high salaries, which can make talent recruitment difficult.
The competition for investment dollars
The first and arguably most important attribute of the southeast’s ecosystem is the rapidly growing number of startups; however, the number of investment firms is not keeping up. This creates an early on-set of competition for investment dollars. The limited pool of local investors will oftentimes be looking to invest on at least a national basis, while a startup will need to be focused more regionally for an early capital raise. Your company will need to find a way to stand out in a sea of competition.
The vast majority of founders end up focusing in the wrong area. While a great product is necessary to compete, other business components such as customer journey and specific revenue targets must be perfected. It is not sufficient to say that you will target a massive market. Investors want to hear a specific plan about how you are going to dissect that large market and approach each type of customer. General plans almost always lead to a muddled outreach approach and a revenue model that lacks clarity and intent.
A majority of the capital available for deployment in the southeast has been generated by professionals over the course of their careers. Currently, the region is not known for having hundreds of electrifying exits. As a result, you will encounter investors who are often timid and not as eager and willing to look for highly risky and speculative investments. In the southeast, your average investor has spent 20-30 years getting to the point where they can start investing on an angel/venture basis, and as such, they guard their capital much more closely. You’ll need to tell a very specific type of story to gain their trust and investment.
Recruiting top talent
Raising capital is only ⅓ of the battle. Recruiting your initial group of all-stars can be a daunting task in a startup environment like the southeast. The southeast is home to some of the largest and most well-known brands in the world. Listing them could be an entire article unto itself, but a small taste includes Home Depot, Bank of America, Coca-Cola, and Disney. The firms are a major boon for the region as they offer very stable employment with relatively high salaries and great benefits. This, however, can be tough for startups to match. You will need to have a compelling story to convince your early team that the growth opportunity at your business outweighs the stability of the big brands.
If no one wants to work for you, scaling will not be an option. Competing with some of the largest brands in the world for talent is not easy, especially since these companies typically offer comfortable salaries and great benefits. There are really two areas of importance when it comes to hiring great people:
- Tell a compelling story about how your firm’s product is going to truly impact a given market. Oftentimes, prospective employees are less concerned about what the product is and how it works—they want to hear more about why matters and how it is going to drive industry change. The latter are essentially proxies for their own career trajectories.
- Create a culture of hard work, but not unreasonable work. Many brilliant startups have failed due to institutionalized burnout. High turnover is devastating to young companies. Not only do you lose someone who was getting things done, but you also have to start the recruiting and training process over again. Also, any level of turnover will have an effect on the overall morale and how people view the company. Always keep in mind the popular adage that most people don’t quit jobs, they quit bosses.
How do you compensate for these characteristics?
There’s a common theme here: all firms must tell a compelling story to the market, to their investors, and to themselves. This will be crucial to the early success of your company. An early-stage business lacks true financial fundamentals, so it is essential you are able to impart the right message to each key audience correctly.
The story that resonates in the southeast is early revenue. While we often hear about hockey stick growth being a requirement for a truly successful exit, it is not necessary to scale your business early on and raise a round of capital.
Within our region, you will be challenged by nearly every investor you meet to monetize your solution immediately and start generating revenue. Depending on your business, this may seem difficult or even impossible to do. However, if you commit to it and assure your investors that it is a key focus, then you will find your pitches and term sheets much more favorable.
DealCloud, a Charlotte fintech firm, recently had a very successful exit when it was purchased by Intapp last fall. The six-year path to that success was very bumpy, but the initial success was entirely dependent on early revenue. DealCloud’s intention was to compete in the extremely busy customer relationship management (CRM) space with a niche focus on alternative asset managers—think private equity, venture capital, and investment banking firms. The story and focus, in the beginning, were entirely based on working in a seemingly unscalable space, comprised mostly of firms that oftentimes had only three to five users. This market was valuable because it required shorter implementation periods and lead to early revenue. DealCloud eventually went upmarket with deals that would include well-known firms with hundreds of users, but the path to those deals was laid with hundreds of smaller ones. If too much time had been spent early on trying to sell investors on a plan for enterprise sales, the company would not have been able to raise multiple rounds and expand so quickly. Early revenue, even if completely unscalable, was the key to DealCloud's success, just as it has been for Rabbu.
The Southeast’s future
While these characteristics are likely to persist for some time, there is no doubt that the southeast’s start-up ecosystem is quickly changing. The southeast is on a path to become a new major startup hub over the next few years, with focus on key cities like Charlotte, Raleigh, Atlanta, Birmingham, and Nashville. With the foundation of more and more startups and the successful exits of some earlier ones, the region is readying itself for a whole new generation of investors. Investment and startups tend to act like a chicken and egg problem—you seemingly can’t have one without the other.
When it boils down to it, growing a company in the southeast is defined by a need for early revenue and the ability to attract talent. This requires both a plan to grow early on as well as a compelling company story. Once you have these, you can return to focusing on the heart of what you set out to do: build a great product.